119San Francisco Port makes the news

The port commission and staff are
working hard to improve an incredible resource for both commerce and the
public. We commend them for accomplishments to date and their willingness
to address deferred maintenance challenges straight on.

S.F. Port hamstrung by crumbling piers, tough
development rules

In a perfect world, the Port of San Francisco would
develop its crumbling piers, each with a glorious view of the bay, and
reap millions of dollars in rents and tax revenues.

But in the imperfect world that entails development of
the waterfront, little or none of this has happened because of a thorny
welter of state laws, local waterfront plans and, in some cases,
neighborhood opposition.

Then there is the fact that the piers have
deteriorated to a state where it will cost $1.4 billion to rehabilitate
them. The port doesn't have that kind of money, and developers, who do,
have walked away from port deals when they learned how much they'd have to
spend to fix up the rotten piers.

A case in point can be found in the fate of a prime
piece of real estate at the foot of Telegraph Hill - a cluster of three
piers that jut out into the bay from the Embarcadero, about halfway
between Fisherman's Wharf and the Ferry Building.

More than eight years after the first call went out
for proposals to transform the 20-acre property at Piers 27-31 into a
recreational and commercial center, one prominent developer spent millions
of dollars only to see its ambitious project fall by the wayside. Now, a
second company is talking about making one last proposal after struggling
for more than a year to come up with a workable plan.

The Port of San Francisco is a city agency whose five
commissioners are appointed by the mayor and must be confirmed by the
Board of Supervisors. The agency has a staff that is responsible for the
port's sprawling operations, which include managing, leasing, developing
and maintaining port properties.

The most recent port proposal - by Shorenstein
Properties LLC - includes a cruise ship terminal, recreation areas and
office buildings. But environmental groups have opposed the project,
neighbors have threatened a lawsuit, and the economics remain so murky
that it might not happen even if it could attract the necessary public
support.

"This is a very complex project with many moving parts
and several constraints," said Tom Hart, executive vice president at
Shorenstein Properties. "We have the financial capacity to hang in there,
but the mental desire wanes the more time that passes."

The port initially had hoped that the Shorenstein
project, which featured mostly offices and recreational space, would
restore the rust-eaten, seismically unstable piers and generate rent to
chip away at the port's crushing deferred maintenance bill.

Senior port officials liked Shorenstein's proposal
even more after the developer proposed making Pier 27 the city's main
cruise ship terminal. That followed another developer backing out of a
deal in 2006 to create a terminal at Piers 30-32, citing soaring pier
repair costs. Pier 35, which has served as the cruise ship terminal for
decades, is dilapidated and damaged by termites.

The port's infrastructure problems harken all the way
back to 1968, when state legislation transferred ownership of the
waterfront from the state to the city, but did not say where the money
would come from to maintain the piers and other port property.

Unlike other self-supporting city agencies that own
property, the port has no predictable income stream to match its expenses
and allow it to borrow funds to tackle major capital improvements. Yet it
has inherited 7.5 miles of property that, despite its world-class views,
is in serious decline.

Maritime to real
estate

Decades of a flagging maritime
industry on the waterfront have meant that the port has turned to
commercial real estate development for income. But that strategy has
proved more difficult than first imagined.

For example, the port entered into some long-term
leases in the late 1970s - most notably at the heavily trafficked tourist
destination Pier 39 - that have not adjusted upward to reflect market rate
increases.

The port is also slow to benefit from the financial
success of more recent real estate projects like the Ferry Building
because high up-front infrastructure costs mean that it takes a long time
for developers to recoup their own investments before they are obligated
to pass on profits to the port.

And any new projects also are constrained by state
laws that control what can be built on the waterfront, local land use
plans and politically active neighbors. The Board of Supervisors also must
approve all new development projects, triggering a tricky political
process.

"I think there's a recognition that the existing
business model just isn't going to provide the solutions," said Port
Commission President Ann Lazarus. "It will take a lot of creative looking
at the rules and regulations and revenue sources that we haven't explored
before."

When the Giants opened their popular ballpark in 2000
- on what had been industrial parking lots - and the restored Ferry
Building opened to rave reviews three years later, it appeared that San
Francisco was in store for a waterfront renaissance.

Instead, those projects turned out to be the exception
to the rule as most of the city's shoreline has remained stagnant, stalled
by rising repair costs as the piers, built in the early to mid-1900s, have
continued to deteriorate.

Meanwhile, neighborhood opposition and state laws have
not gone away.

A huge disappointment was the Piers 30-32 project,
south of the Ferry Building. The project was promoted as the site of a
$270 million cruise ship terminal and shopping arcade.

That plan was seven years in the making. Then, last
year, Australian developer Lend Lease decided to walk away, scared off by
the $155 million projected cost to fix the piers. As of now, the port has
not revealed any new plan for the piers.

An International Museum of Women at Pier 26 was
scuttled in April 2005 after restoration costs doubled to $20 million;
historic buildings at Pier 70 are near ruin, and the port does not have
the $252 million needed to refurbish them; and the agency is $3 million
short on a decade-old proposal to replace Piers 36 and 34 with a
park and recreation space.

Piers 26, 28, 35, 38, 54 and 80 will need to be closed
in the near future if the port fails to secure funding for upgrades,
according to Tina Olson, the port's deputy director of finance and
administration.

Last gasp for Shorenstein

After months of delaying a Port Commission vote on the
Piers 27-31 project, Shorenstein is likely to present what it has
described as its final offer early next year.

Hart said the company spent $4 million on more than 50
draft development plans. If an agreement can't be reached, Piers 27-31
will face the same uncertain fate as many other port
properties.

The biggest hurdle facing Shorenstein since it got the
rights to develop the land in 2006 is the company's proposal for 520,000
square feet of office development as the project's economic engine.

State laws that dictate what can be built along the
California shoreline limit waterfront uses, allowing, for the most part,
maritime, historic restoration, recreation, retail and
other commercial activities that are open to the general public.

Neither residential nor office development is on the
list. Compromises have been struck in the past to allow projects to go
forward, and special state legislation can be used to supersede those
laws, but typically not without a lot of debate and negotiation.

"The cruise ship terminal (now proposed by
Shorenstein) is a tremendous public use, but we have serious concerns
about the amount of office space we have seen so far," said Paul Thayer,
executive officer of the State Lands Commission, which governs what can be
built along the California waterfront.

Even if the plan were to clear state regulators, the
Telegraph Hill neighbors - who were instrumental in blocking a previous
proposal at Piers 27-31 - have argued that the proposed office buildings
would shortchange promised recreational space and are inconsistent with
area height limits. They have been joined by some local environmental
groups that say a cruise terminal contradicts a city waterfront plan
prioritizing public access.

Opponents predict that Shorenstein is not likely to
receive the support necessary to get the project approved. If the Port
Commission were to approve the project, the port itself could face a
lawsuit because the development would deviate so drastically from the
original plan, they say.

"The underlying issue here is that the port is
entertaining development proposals that are inconsistent with their own
plans for the piers," said David Lewis, executive director of the
environmental group Save the Bay. "They asked developers for proposals for
recreation and public access and now they are considering office buildings
and a cruise ship terminal."

Lewis and others said the port should issue a new call
for proposals on Piers 27-31 and should solicit public input to rewrite a
city waterfront plan that reflects current economic realities and public
priorities.

Lazarus said there is no time to go back to square
one, though she acknowledged the trouble faced by Shorenstein and that the
plan might not sail.

Most important, she said, the port needs to quickly
find a permanent home for cruise ships, because its longtime cruise ship
terminal, Pier 35, may well collapse in the next five years.

"I don't think putting this on hold is an option,"
Lazarus said. "There is an urgency to complete the cruise ship portion ...
maybe that could be severed off from the other part of the
development."

Changes in the offing

Hart said Shorenstein is prepared to lower the height
of a controversial office building from four stories to three. The company
also is willing to allow more cruise ship terminal use than before, he
said - a sticking point with the Port Commission.

If the company can convince the commission to agree
with its development plan, financing the deal would present its own
complications.

Shorenstein and the port have discussed many funding
schemes to get around the port's general lack of funds for major capital
investment.

The most recent proposal relies on the port issuing
bonds to pay for the seismic repair of Pier 27 and a new cruise ship
terminal, which is estimated to cost $60 million to $100 million. The port
would then use the increased tax revenue produced by the improvements at
the pier to repay bondholders.

The developer would pay approximately $145 million in
repair costs at Piers 29 and 31 and then about $1.2 million a year in rent
for 66 years. The company has said it would relocate its longtime
headquarters from the Bank of America Center on California Street. It
would become the property manager of its new offices and others at the
piers that it would rent out.

Some good news

Olson said that although many hurdles lie ahead, the
port has made recent strides - and there is reason for hope elsewhere on
the waterfront.

Refurbished Piers 1 1/2, 3 and 5 had a grand opening a
year ago, and offices and restaurants are expected to fill the space in
the coming months. The Exploratorium has decided to spend $175 million
repairing Pier 15, with some investment from the port, and is scheduled to
move there from its Palace of Fine Arts location in the coming
years.

And the port recently benefited from state legislation
that will allow it to develop "seawall" lots, most of which sit on
landfill west of the Embarcadero, but are nonetheless governed by the same
state laws as waterfront property.

The port believes that the largest of the plots,
Seawall Lot 337, across McCovey Cove from the ballpark, could bring in $15
million in annual rent.

In February, a proposed $185 million
park bond measure heads to the city ballot. It contains
$33.5 million to repair and seismically upgrade unspecified areas along
the city's shoreline and to create new waterfront parks in areas under the
port's jurisdiction.

"We're starting to have some new revenue streams that
we will be able to use in the coming years; we're starting to get out of
our dire straits," Olson said.